Economy will prove naysayers wrong

As the end of the year approaches, it has become increasingly clear that 2014 will be a year marked by moderate economic growth and low inflation for China. Analysts and investors have already shifted their attention toward the year ahead and beyond. They have been following economic news and paid close attention to the policy announcements made during the Central Economic Work Conference, which ended on Dec 11.

Recent economic data has been underwhelming. Between the slowing of exports (4.7 percent growth in November), the stalling factory output (7.2 percent growth in November), and the cooling property market, most indicators point toward a slowdown in the Chinese economy. GDP growth fell to 7.3 percent in the third quarter, and a majority of analysts have forecast that growth will slow to about 7 percent in 2015.

These forecasts are generally consistent with the statements made during the CEWC, where China's leaders, including President Xi Jinping, said the economy faces "big downward pressures". They also said they would accept a lower and more sustainable growth rate in the years ahead, which they refer to as the "new normal". No official growth target has yet been announced, but central bank economists, in their personal capacity, have said real GDP growth is likely to slow down from 7.4 percent this year to 7.1 percent in 2015. Many other observers expect that it will be set at 7 percent.

In spite of these moderate forecasts, the current slowdown has reignited the debate over the medium-term prospects for the Chinese economy. Although most analysts remain confident, some commentators have argued that the country is slipping into the dreaded middle-income trap, perhaps even suggesting an end to China's economic miracle. These fears are however largely overblown. At this stage, the scenario of a moderate slowdown for next year and beyond, which is preferred by a majority of analysts, should be favored over the prediction of a sharp slowdown.

Experience shows that some economic commentators tend to overreact to weak economic data. They place too much weight on latest economic indicators and sometimes miss the bigger picture. During 2008-09, for instance, the global recession led some to quickly forecast a sharp decline in China's growth. But that did not happen, in part because they had failed to anticipate the strong policy response and the efficacy of the stimulus package.

This time again, China's growth faces real headwinds and cyclical challenges, but the forecast of a major slowdown may underestimate the strength of the policy response. The government, for instance, announced during the CEWC that it would support growth by pursuing new infrastructure projects and technology initiatives. The official statement also said that "prudent" monetary policy and "proactive" fiscal policy will play a role in supporting growth for the year ahead and beyond.

In addition, some commentators lend too much credence to the middle-income trap. They are overly keen to interpret mixed economic data as evidence that China has entered the middle-income trap, even though growth concerns remain primarily cyclical. It is true that some countries have faced sudden slowdowns after reaching the middle-income stage. However, studies show that slowdown in growth can occur at any stage of development - not necessarily only when a country reaches the middle-income stage.

In Asia, in particular, economies such as the Republic of Korea, Singapore, Taiwan and Hong Kong have shown that the middle-income trap can certainly be overcome. It would therefore be wrong to assume that the Chinese mainland is poised to slow down simply because it has reached the middle-income stage.

In fact, in a recent report by the Asia Society Policy Institute, Daniel Rosen says: "China has not exhausted its growth potential. On the contrary, decades of more high-quality growth is possible - provided reforms are made". In other words, China should be able to stabilize growth at a moderate level, provided it keeps reorienting its growth model.

Overall, this year has seen good progress in the implementation of the reform agenda. But political determination will be required to further accelerate the pace of reforms and stabilize growth in the medium term, going beyond next year. In this sense, the announcements made during the CEWC represents a positive development, as they underscore the government's commitment to support growth. For all these reasons, the majority view of a moderate growth for the medium term should be favored over the scenario of a sharp slowdown.